Navigating health insurance can be very stressful. Contact your health insurance company to secure a hard copy of your medical benefits. Be sure to keep the booklet handy for reference.
Health Savings Accounts (HSAs)
A Health Savings Account (HSA) is a tax-exempt trust or custodial account you set up with a qualified HSA trustee to pay or reimburse certain medical expenses you incur. You must be an eligible individual to qualify for an HSA. No permission or authorization from the IRS is necessary to establish an HSA. You set up an HSA with a trustee. A qualified HSA trustee can be a bank, an insurance company, or anyone already approved by the IRS to be a trustee of individual retirement arrangements (IRAs) or Archer MSAs. The HSA can be established through a trustee that is different from your health plan provider. Your employer may already have some information on HSA trustees in your area.
If you have an Archer MSA, you generally can roll it over into an HSA tax-free.
What are the benefits of an HSA?
- You can claim a tax deduction for contributions you, or someone other than your employer, make to your HSA even if you don’t itemize your deductions on Schedule A (Form 1040 or 1040-SR).
- Contributions to your HSA made by your employer (including contributions made through a cafeteria plan) may be excluded from your gross income.
- The contributions remain in your account until you use them.
- The interest or other earnings on the assets in the account are tax-free.
- Distributions may be tax-free if you pay qualified medical expenses.
- An HSA is “portable.” It stays with you if you change employers or leave the workforce.
Qualifying for an HSA
- You are covered under a high deductible health plan (HDHP), described later, on the first day of the month.
- You have no other health coverage except what is permitted under another health coverage.
- You aren’t enrolled in Medicare.
- You can’t be claimed as a dependent on someone else’s 2019 tax return.
Under the last-month rule, you are considered to be an eligible individual for the entire year if you are an eligible individual on the first day of the last month of your tax year (December 1 for most taxpayers). If you meet these requirements, you are an eligible individual even if your spouse has non-HDHP family coverage, provided your spouse’s coverage doesn’t cover you. Also, you may be an eligible individual even if you receive hospital care or medical services under any law administered by the Secretary of Veterans Affairs for a service-connected disability.
If another taxpayer is entitled to claim an exemption for you, you can’t claim a deduction for an HSA contribution. This is true even if the other person doesn’t receive an exemption deduction for you because the exemption amount is zero for tax years 2018 through 2025.
Each spouse who is an eligible individual who wants an HSA must open a separate HSA. You can’t have a joint HSA.
High deductible health plan (HDHP).
- A higher annual deductible than typical health plans, and
- A maximum limit on the sum of the annual deductible and out-of-pocket medical expenses that you must pay for covered expenses. Out-of-pocket expenses include copayments and other amounts but don’t include premiums.
An HDHP may provide preventive care benefits without a deductible or with a deductible less than the minimum annual deductible. Preventive care includes, but isn’t limited to, the following.
- Periodic health evaluations, including tests and diagnostic procedures ordered in connection with routine examinations, such as annual physicals.
- Routine prenatal and well-child care.
- Child and adult immunizations.
- Tobacco cessation programs.
- Obesity weight-loss programs.
- Screening services including cancer, heart, and vascular diseases, infectious diseases. mental health conditions, substance abuse, metabolic, nutritional, and endocrine conditions, musculoskeletal disorders, obstetric and gynecological conditions, pediatric conditions, and vision and hearing disorders.
What is an FSA?
A Flexible Spending Account (FSA) is a special account you put money into that you use to pay for certain out-of-pocket health care costs. You don’t pay taxes on this money. This means you’ll save an amount equal to the taxes you would have paid on the money you set aside. Employers may make contributions to your FSA but aren’t required to.
You use your FSA by submitting a claim to the FSA (through your employer) with proof of the medical expense and a statement that it has not been covered by your plan. You will then receive reimbursement for your costs. Ask your employer about how to use your specific FSA.
A few fast facts about FSAs
- FSAs are limited to $2,650 per year per employer. If you’re married, your spouse can put up to $2,650 in an FSA with their employer too.
- You can use funds in your FSA to pay for certain medical and dental expenses for you, your spouse if you’re married, and your dependents.
- You can spend FSA funds to pay deductibles and copayments, but not for insurance premiums.
- You can spend FSA funds on prescription medications, as well as over-the-counter medicines with a doctor’s prescription. Reimbursements for insulin are allowed without a prescription.
- FSAs may also be used to cover costs of medical equipment like crutches, supplies like bandages, and diagnostic devices like blood sugar test kits.
FSA limits, grace periods, and carry-overs
- It can provide a “grace period” of up to 2 ½ extra months to use the money in your FSA.
- It can allow you to carry over up to $500 per year to use in the following year.
Your employer can offer either one of these options but not both. It’s not required to offer either one. At the end of the year or grace period, you lose any money left over in your FSA. So it’s important to plan carefully and not put more money in your FSA than you think you’ll spend within a year on things like copayments, coinsurance, drugs, and other allowed health care costs.